益華電腦 (CDNS) 2012 Q3 法說會逐字稿

Good afternoon.

My name is Ally and I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems third-quarter 2012 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host, Alan Lindstrom, Group Director, Investor Relations.

Mr. Lindstrom, you may begin your conference.

Thank you, Ally, and welcome to our earnings conference call for the third quarter of fiscal year 2012.

The webcast of this call can be accessed through our website, Cadence.com and will be archived for two weeks.

With us today are Lip-Bu Tan, President and CEO, and Geoff Ribar, Senior Vice President and CFO.

Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations.

For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission.

These include Cadence's most recent reports on Form 10-K and Form 10-Q including the Company's future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-GAAP financial measures today.

Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures which can be found in the quarterly earnings section of the Investor Relations portion of our website.

A copy of today's press release dated October 24, 2012, for the quarter ended September 29, 2012, and related financial tables can also be found in the Investor Relations portion of our website.

Now I'll turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us.

Momentum continues in Q3 as we delivered strong results.

Total revenue was $339 million.

Non-GAAP operating margin was 24% and operating cash flow was $92 million.

While the semiconductor and world economic environments remains soft and uncertain, most of our customers continue to invest in new designs for electronic products.

Ongoing design activity and our own strong pipeline and backlog give us confidence in raising our Q4 guidance.

Geoff will discuss later in the call.

Now let us start with highlights for Silicon Realization.

In Q3, we strengthened our capabilities at advanced nodes, including 28-, 20- and 16-nanometers and below.

We continue to focus on advanced technology and collaborate with leading foundries and key ecosystem partners on test chips for the 16- and 14-nanometer FinFET based processes.

The Encounter Digital Platform has been used for over 150 tape-outs at 28-nanometer, over 40 at 20-nanometer, and 5 at 60-nanometer and below.

Because our Virtuoso Custom Analog Platform is the gold standard, Cadence tools are used for virtually all advanced node designs.

Our customers are realizing the benefits of our renewed focus and investment in signoff solutions.

Recently, STMicroelectronics used our integrated signoff technologies and cut several weeks from the design cycle for a complex SoC.

We collaborate with ARM to optimize their POP IP with our Encounter Digital Platform to improve power, performance, and area for ARM's Cortex-A9 and A15 processors.

TSMC recently qualified our Encounter Digital, Virtuoso Custom Analog, and signoff tools for its 20-nanometer design infrastructure.

Our Incisive Verification Platform continues to be preferred for designing and verifying complex SoCs.

Recently, STMicroelectronics reduced verification time from 35 weeks to 25 weeks by using Incisive with Cadence Verification IP on a 32-bit microcontroller.

Cadence is the leader in Mixed-Signal solutions.

As consumer, mobile and automotive market segments grow, the demand for Mixed-Signal solutions is growing.

Building on our leadership in analog design, this demand is driving increased adoption of our digital and verification tools.

We recently published the industry's first Mixed-Signal Methodology Guide, which has been embraced by designers.

Our recent Mixed-Signal Technology Summit is also quickly sold out.

Both indicate the growing importance of the Mixed-Signal market segment.

Denso, a global automotive component manufacturer in Japan, switched to our integrated Mixed-Signal flow and significantly improved quality and productivity on low-power Mixed-Signal SoC.

3D-IC designs that combine separate processor and memory chips in the same package have the potential to significantly improve performance and reduce power in mobile products and extend Moore's law.

Cadence is the leader in 3D-IC design.

We just announced that as part of the ongoing collaborative effort, TSMC has validated our 3D-IC design flow with test chips.

TSMC's test chips use both our design tools and Wide I/O memory controller IP and PHY.

Next, let us look at SoC Realization.

We continue to make progress in both Design and Verification IP.

Cadence is focused on providing industry-leading memory and storage controllers, PHYs and verification models.

In Q3, we announced our DDR4 memory controllers and PHYs, the first available in the industry, were also the first to be silicon proven on the TSMC 28-nanometer process.

The advantages of DDR4 should be especially appealing to high-speed infrastructure providers that serve the cloud market segment.

Verification IP continues to be one of our fastest growing product lines.

We signed our largest VIP contract to date with a major customer.

This demonstrates the growing need for quality VIP to verify complex systems and the successful delivery of these components by Cadence.

Recently, Samsung was able to significantly accelerate the validations of a PCI Express interface for its solid-state drives using Cadence Accelerated VIP with Palladium XP.

Accelerated VIP running on Palladium XP increased the productivity of Samsung's validation team by 100%.

Now let us talk about System Realization, where we see great momentum.

We continue to see strong customer demand for Palladium.

Hardware-assisted verification continues to grow rapidly due to increasing hardware-software co-development challenges faced by the customers that develop complex systems, with emulation as the preferred technology to address that need.

The technology advantages of the processor-based Palladium solution gives us a leadership position in emulation and enables Cadence to capitalize on strong demand for this technology.

In Q3, Palladium XP sales were strong, with multiple new and repeat orders from both systems and semiconductor companies.

We now expect sales to be flat-to-up for the year compared.

Palladium has particular strong momentum with companies serving the high-end consumer market, including mobile and gaming products, and cloud infrastructure.

Our PCB and IC packaging product lines continue to see good growth.

Integration of Sigrity technology into our Allegro Platform is going well, and customers are very interested in the integrated solution.

Recently, we delivered new technology for both OrCAD and Allegro Platforms including capabilities that accelerate the timing closure for high-speed interfaces by 30% to 50% and enable design collaboration using Microsoft SharePoint.

Cadence is focused on technology leadership.

The industry is seeing that; as a result, we are now attracting outstanding technologies from inside and outside the industry to join the Cadence team.

In summary, Cadence delivered strong Q3 results and we are working with customers and partners on their most challenging designs.

We continue to strengthen and expand our Silicon Realization product portfolio.

Our Design IP VIP portfolios are expanding and the demand remains strong for Palladium XP.

With that, now I will turn it over to Geoff who will review the financial results and provide our outlook.

Thanks, Lip-Bu, and good afternoon everyone.

I will review the results for the third quarter, present our outlook for Q4, and update the outlook for 2012.

For Q3, Cadence continued to produce strong operating results.

Total revenue was $339 million, compared to $326 million for Q2 and $292 million for the year-ago quarter.

The year-over-year growth was 16%.

Product and maintenance revenue was $310 million, and services revenue was $28 million.

The revenue mix for the geographies was 43% for the Americas; 20% for EMEA; 20% for Asia; and 17% for Japan.

Total costs and expenses on a non-GAAP basis for Q3 were $257 million compared to $253 million for Q2 and $240 million for the year-ago quarter.

Q3 headcount was 5,119 compared to 4,850 for Q2.

The Sigrity acquisition added 110 great employees and the rest primarily came from hiring in R&D and technical field positions.

Non-GAAP operating margin for Q3 was 24% compared to 23% for Q2 and 18% for the year-ago quarter.

For Q3, we recorded GAAP net income per share of $0.21 compared to $0.23 for Q2.

For Q3, non-GAAP net income per share was $0.21 compared to $0.19 for Q2 and $0.14 for the year-ago quarter.

Operating cash flow for Q3 was $92 million compared to $67 million for Q2 and $52 million for the year-ago quarter.

Total DSOs for Q3 were 34 days compared to 36 days for Q2, and 50 days for the year-ago quarter.

Our DSO target is approximately 35 days.

Capital expenditures for Q3 were approximately $8 million.

Cash and short-term investments were $745 million at quarter end; about half of that cash was in the US.

For Q3, approximately 90% of all orders booked were ratable.

Weighted average contract life for Q3 was 2.4 years.

On a weighted average basis, run rates in Q3 contract renewals increased over the prior contracts.

Now, let's address the outlook for the fourth quarter of 2012 and our update for fiscal 2012.

We are increasing our fiscal 2012 outlook for bookings, revenue, earnings per share and cash flow due to strong Q3 results and expectation of continued strong demand in Q4.

For Q4 2012 we expect revenue to be in the range of $335 million to $345 million.

Q4 non-GAAP operating margin is expected to be in the range of 22% to 23%.

Non-GAAP total cost and expenses will be up sequentially, primarily due to the impact of higher bookings on sales compensation and continued growth in headcount, particularly in R&D and technical field positions.

GAAP EPS for the fourth quarter is expected to be in the range of $0.13 to $0.15.

Non-GAAP EPS for Q4 is expected to be in the range of $0.18 to $0.20.

Now for our update of fiscal 2012 outlook.

Bookings are expected to be in the range of $1.325 billion to $1.345 billion compared to the prior range of $1.305 billion to $1.335 billion.

We expect weighted average contract life to be in the range of 2.5 to 2.6 years for 2012 and to book at least 90% of our business for the year under ratable arrangements.

We expect revenue to be in the range of $1.315 billion to $1.325 billion for 2012, compared to the prior range of $1.295 billion to $1.315 billion.

Non-GAAP operating margin is expected to be in the range of 22% to 23% on an annual basis for 2012.

Now I want to take a moment to provide some preliminary commentary on 2013.

Our 2013 non-GAAP total cost and expenses will reflect the full-year of cost for Sigrity, our ongoing incremental investment in R&D and technical field positions, and routine increases in the employee-related cost.

We expect to drop approximately 50% of incremental 2013 revenue through to operating income and expect to achieve a mid-20%s non-GAAP operating margin for the fiscal year 2013.

Non-GAAP other income and expense for 2012 is expected to be in the range of negative $11 million to negative $9 million.

For 2012, we expect -- we are assuming a non-GAAP tax rate of 26% and weighted average shares outstanding of 278 to 282 million shares.

GAAP EPS for 2012 is expected to be in the range of $0.58 to $0.60.

Non-GAAP EPS is expected be in the range of $0.75 to $0.77 compared to the prior range of $0.70 to $0.74.

For 2012, we expect operating cash flow to be in the range of $300 million to $320 million.

DSOs for 2012 are projected to be approximately 35 days.

Capital expenditures for 2012 are expected to be in the range of $30 million to $35 million.

We continue to execute on all fronts in Q3 -- sales, engineering and operations -- as we exceeded expectations for our key metrics.

Near-term pipeline is strong which gives us confidence in our Q4 guidance.

Cadence and the EDA industry are generally -- are clearly delivering value to our customers.

However, we are concerned about deteriorating semiconductor business conditions and the impact it could have on our customers' willingness to invest in R&D.

At this point, it's too early to tell whether this may or may not have an impact on our business in 2013.

As is our practice, we will provide a 2013 outlook with our Q4 earnings release.

Operator, we will now take questions.

(Operator Instructions) Rich Valera, Needham & Company.

First question just on the macro environment, Lip-Bu, following up on your questions about customer behavior.

It sounds like you said most of your customers are still spending on design and I think you're seeing strong demand from them, but that might suggest that some customers maybe are pulling back a little, so just wanted to get maybe a little more color on what you're seeing from customers and if there are maybe some customers that are pulling back at all at this point?

Sure, Rich, thank you for the question.

So first of all, I think clearly in the short-term there are some uncertainty in the environment, the macro environment in Middle East, Europe slowdown, China slowdown, but meanwhile, I think we didn't see much slowdown in our customer base.

In terms of the new products, they're launching, the R&D, they are spending.

Clearly, we see some end markets like mobile, data center infrastructure are growing.

Clearly, the slower sector like PC and some portion of the consumer, but all in all, I think there is a lot of excitement about new product announcements like Apple, and Microsoft, and others.

So I think overall, the trend is a little mix in the short term and meanwhile, in longer term, I think there is a lot of new products coming up.

R&D, we didn't see any slowdown.

The other big trend we see is the application-driven design and more software content and then Mixed-Signal, our content becomes more and more and then the design complexity that really needs new and innovative [facto] solutions and that clearly play into our strength.

We have been investing -- take the leadership in some of the areas of design and technology, customer, ecosystem partners that we've been working with close the last few years.

We're clearly delivering the value, the design tool, the IP that they need.

So clearly, we are looking forward for the outlook.

Okay, that is helpful.

With respect to emulation, obviously continuing to see impressive strength there and you've bumped up your guidance for the year there, I'm wondering if you'd be willing to [say] anything about next year on emulation.

I know you don't want to give specific guidance but any thoughts on whether emulation could, in fact, have another year on par with this year, flat, up or down?

Or anything you'd be able to say about the sustainability of that business would be helpful.

Sure.

Rich, thank you so much for the question.

So, clearly, as I mentioned, demand for Palladium remains strong and we guide slight to up for this year.

I think the Palladium is a gold standard and then the processor base, design and what the customer is looking for in terms of performance, capacity, and then the design, that is critical to them.

I mentioned earlier before 40-nanometer and below, anything that is processor-intensive, this is a must have.

It is a gold standard.

We continue to see the strong demand as long as [another] industry continues to do that.

And then meanwhile, we also caution about the environment.

This is a hardware product, but clearly the needs of finding the [box] earlier and verify that is critical for systems and semiconductor companies.

I think I'd like to add, again, these products are largely used 24 by 7 at our customers.

It is not just our products but it is our competitors' products.

They are used 24 by 7; I believe it is a secular trend.

That is helpful.

Thank you.

And one final one if I could and I guess this is probably for you, Geoff.

You gave a couple of metrics that you are looking at for 2013, the 50% incremental margins and targeting a mid --

Rich, we lost you.

Operator, can we maybe take the next question and when Rich gets back online, we'll go ahead?

Yes, sir.

Mahesh Sanganeria, RBC Capital.

Actually, I was going to follow-up on Rich's question on you gave some metrics for 2013 and I missed part of it, if you can restate that, that would be helpful to start with.

Sure, I think the two key metrics is again, which we've said before.

We expect to get to the mid-20%s in 2013 for the full year and generally, we expect to be able to drop 50% of the revenue increase to the bottom line.

Of course, that is somewhat always going to be dependent on macroeconomic conditions, the size of the growth, an acquisition could potentially change that but that is generally been our metric that we've delivered on over the past few years.

Okay, then the next question is for Lip-Bu.

Now you have been closely monitoring the business for awhile and the history of the business is that we have, we -- it was more of a static and now beginning to see some signs of some real growth.

So if you can give us, based on your time spent with the customers, what do you expect the industry could grow for next five years and what are the -- some of the factors we should consider in estimating that?

That will be very helpful.

Yes, Mahesh, thank you so much for the question and clearly, I think, and as you know, I spend a lot of time with the customers and overall, I'm excited about this EDA industry.

The future is very bright and our [tool in] solution is really needed essentially for the customer for their design.

And as you know, I'm very passionate about the semiconductor industry that the semiconductor is the heart of all the key electronic design.

A couple of big trends I see from the customer, one is the application-driven design and clearly, it helps a lot in terms of from the foundry, IP, tools, and also the software stack and now that vertical collaboration is critical for success.

We see that and we basically provide our tool in IP to address that challenge.

That is why I think clearly, the design application-driven design and also the Mixed-Signal; more and more components of semiconductor are Mixed-Signal.

And the analog/digital all come together and this is a very complex design and that is critically helpful for doing that.

And so -- and meanwhile, another big opportunity is the data center infrastructure.

The Web-enabled applications and then the mobile, as we all know, from smartphones to tablets, now it is really driving all the growth of that.

So I think all in all, I think this is a tremendous opportunity, but clearly I'm -- we are very mindful of the macroeconomics and some of our customers have seen some slowdown.

As I mentioned earlier, in Middle East, in Europe, in China, and also US, we are recovering.

So I think all in all, we have put that factor in and we watch very carefully.

We work closely with our customers and our IP partners and our foundry partners so that we are really on top of it.

I know we talked about the macroeconomic environment, but I think you have been delivering -- the industry has been delivering pretty consistently, even the Palladium which is a hardware tool which is, I'm assuming that booked in revenues in the same quarter.

And that seems to be embedded an expected path.

I guess that remains a concern, but are there any specific signs you are seeing there that that is going to impact?

Or should we just worry about it and the reality is that semiconductor companies have to continue to invest to stay on their product pipeline that they can't slow down and the EDA industry will not be impacted?

Which side would you take that eventually it will hit you or you think that EDA industry can remain largely immune, driven by the fact that the customers don't have a choice, but to continue to stay on the product roadmap?

Yes, very good question, Mahesh.

So let me answer a couple of key points and then Geoff can follow-up with that.

So first of all, I think clearly, we see a major trend.

It's a system company go vertical, starting from Apple, Microsoft and Google; they all have their own hardware product.

They are starting to embrace the semiconductor to optimize some of the software and the services they want to provide and clearly time-to-market becomes more and more critical.

So clearly we are going to see more growth in the verification side and you touch on the Palladium is one of the key factors on the verification.

Anything that you can find the box earlier, that you can come to the time-to-market earlier, I think that will be a success factor for winning the customer.

And then the other thing I mentioned earlier is the whole mixed-signal design.

It is very hard to find just pure digital.

There is a lot of analog components you have to integrate in.

So I think the real big challenge for all the customers are really the power, low-power is critical in mobile, in infrastructure-related product areas and clearly you have the strength or size that fit in certain -- in a hardware platform.

And then clearly time-to-market is most critical.

And then the other thing is the competitive nature of the business in the semiconductor.

It becomes more and more important that you able to provide a platform.

So not just a chip, the system, the software stack, and you have to be all integrated together.

That is why I think the industry is moving to that direction and we are so well-positioned to capture that.

I think the other point I'll raise, Mahesh, is obviously that our customers are having some challenges right now and having a tough quarter and their outlook isn't great.

But largely, they're keeping engineering teams intact.

There's a few exceptions, but largely keeping engineering teams intact.

As to specific signs, we haven't seen any but we're going to continue to be cautious as we look at the environment being what it is.

Okay, that's very helpful.

I'll just get back in the queue.

Thanks.

Jay Vleeschhouwer, Griffin Securities.

Lip-Bu and Geoff, I would like to ask first about where you are incrementally investing, particularly in headcount, which you did bring up on the call.

A recent check of your website shows that there's been a small increase lately in the number of open positions that you are looking to fill by geo; that is particularly the case, it seems, in the US.

By product area, it looks as though you're more actively looking for in Encounter and in Custom IC, less so with respect to PCB and Palladium.

The question is, are these headcount indications a reasonable indication of your intentions by geo or by brand.

And particularly in the case of Custom where it does look again as though you're looking to hire a good deal more people, is that something that you would've been doing anyway or is this perhaps a response to the SpringSoft acquisition?

So, Jay, good question.

Let me start and then Geoff will chip in.

So first of all, I think clearly we increased our headcount.

Right now, it is about 5,119 and then some portion has come from the Sigrity acquisition and some of them come from the recruitment that we have successfully done.

And then I mentioned in my remarks that we are really excited about some of the top talent we were able to attract from the industry and outside the industry to come on board.

We create a culture that people can come and innovate and we [have begun] to be the leadership in the technology side.

So I think in terms of the investment, we have been very focused on R&D recruitment and also focused on the [FAE], the customer support to support our customer better.

I think the investment so far, we have been very focused on taking the leadership in the digital, especially in the advanced nodes.

FinFET, 3D-IC, we are taking the leadership there and then in the advanced nodes and then secondly, our commitment to ARM and the ARM ecosystem.

And we have a lot of success in that.

We are going to continue expand that.

And then we also, I had mentioned in the sign-off area and customers are really looking for alternatives.

We are well-positioned to address that.

And then in terms of the IP SoC, we have been continuing to drive success in the Verification IP.

We continue to have a fastest growing area and then we also double down in some of the design IP, especially in the memory, storage controller PHY area and also in high-speed in our interface area.

And then in terms of the systems side, continued double down on the Palladium leadership as a gold standard.

And then also driving some of the -- in our PCB become more and more critical in terms of packaging, IC packaging, [ball] packaging, to serve the vertical customer sector and then, so, besides digital, the other one is the analog.

We double down, take the leadership further in terms of advanced nodes and also some of the features and performance; we continue to drive success on that side.

I think across the board, we are really looking at the roadmap.

We like what we have.

We continue focus on execution; continue to attract the best talent inside and outside the industry to able to leapfrog some of the design.

Yes, and I think, Jay, Lip-Bu got it.

It is across the board we are making investments in R&D and the technology part of the sales organization.

Again, we are -- continue to follow EDA360 as far as our investment philosophy is and please don't take open [racks] as every place we are investing, sometimes we get people on board, so --

Okay.

Question on emulation; actually a couple questions.

One, could you comment at all on remaining backlog and how lead times look right now?

There was in the quarter a pretty substantial reduction in your inventories which I assume would've been reasonably correlated to the emulation deliveries.

So, are you at a point now where perhaps you need to materially rebuild the emulation backlog or could you comment at all on how lead times look there?

Yes, so there's been no change really in our business.

We are happy with some progress we made on inventory.

I think we are happy with that progress.

We shipped a couple of units right at the end of the quarter which is one reason why inventory is down.

Our backlog is great.

And our lead times are consistent with industry practice.

All right, and then lastly on the software side, to the extent that your tools have been enabled for double patterning, which you talk about at DAC, for instance, a few months ago.

Is there some measurable impact that you could talk about in terms of pricing benefits from that capability or improvements in license consumption and utilization as a result of this new capability?

Yes, so let me start that.

Clearly, when you move the geometry down the 20-nanometer to 16- and 14-, FinFET, double patterning, triple patterning is a very differentiating approach they need to have.

And we work very closely with the leading foundries and then we continue to drive some of the leadership in that.

And in terms of pricing, I don't think you will see so quickly.

I think it is more in terms of ensuring the capability and then helping our customer and our foundry partners, work closely with them to enable that happen, and so that we can drive enough success with our customer.

The pricing and consumption in all this will become later.

I think the volume, as you know, is still very small during the test chips and proofing the performance is more important right now and then a couple of leading customers are engaging very heavily.

But the volume and revenue is still small and -- but I think over the years, it will grow.

Thank you.

Gus Richard, Piper Jaffray.

I just want to talk a little bit about trends and tape-outs for 28, 20, and 16.

Can you just quantitatively talk about or qualitatively talk about how that has been trending?

Are you starting to see an acceleration in 28-nanometer tape-outs?

How much of the 20-nanometer activity at this point is test chips versus people actually taping out full devices?

Yes, very good question.

Right now, as I mentioned, we have 150 tape-out in the 28-nanometer.

I think in terms of volume increase, right now, 28-nanometer are the majority of that.

And then in terms of 20-nanometer, I think clearly, we have done a lot of -- and our 40 is counting, and the 20-nanometer.

It is very much in the early phase of test chips and small volume.

I don't think it would be significant that remain another year but it is engaging.

And then most of the leading companies and customers are heavily engaging with us.

We want to make sure and -- that part is very important -- we emphasize TSMC qualify all the key tools at the 20-nanometer.

So they anticipate when the customer's rolling out on the volume, we will be there so they can use our tool and can be fabricated in the leading foundries.

And that is something that we are really focused on getting that.

In some of the 16-, in our 14-, that is FinFET 20-nanometer and then 3D-IC.

We have five and is counting and we are excited to engage with the leading customer and the foundries and IP partners to do that.

Because that is critical for the next phase when up to 20-nanometer and then some of the complex designs or low-power required, there is some clear benefit of that.

We want to make sure that we have the roadmap, able to engage with the customer, and then with the partners in IP and foundry, we can qualify and fabricate it when they are ready and that is how our tune it to modify, get ourselves ready to support them.

Okay, thank you, very helpful.

And then as a follow-on question, I'm noticing a little bit more activity in 3D packaging, 2.5D packaging, silicon interposers, and it appears there's some people are going to be reaching a much higher volume manufacturing by the end of next year.

With your recent acquisition of Syntegrity (sic), I was wondering if you were seeing a similar increase in activity and if you'd just talk about the opportunity there, it would be helpful.

Sure, so I think clearly, as I mentioned, we are the leader in 3D-IC.

We are very engaged with our foundry partners and that is critical.

But as you know, it is not just the technology; it is also the cost involved.

So I think so far the deployment of the 3D-IC has been slower.

Clearly, people are moving to 2.5D, they are engaging but I think in terms of significant revenue from that will be further down the road, but I think we just want to make sure that we -- our tools and then working with our foundry partners, make sure that when they are ready, we are able to support our customers in a cost-effective way to drive that.

Got it.

Okay, thanks so much.

Krish Sankar, Bank of America.

(technical difficulty) calling in for Krish Sankar.

I just wanted to get a little bit more color on your view on the acquisitions that have been occurring in this space.

Can you maybe give us your thoughts on how you envision your conversations with customers may have changed with Synopsys acquiring emulation company, EVE, as well as Jay had mentioned, Synopsys integrating SpringSoft into their business now, which goes up against your Custom IC Design?

I noticed that your Custom IC Design segment as well as sales to Asia has grown pretty nicely during the quarters.

Maybe if you can comment on that?

Sure, it is a very good question.

Let me try to address that.

So, first of all, I think you have two questions, one is the EVE and also SpringSoft and more specifically on the Synopsys acquisition on both.

So let me try to address both of them.

So first of all, SpringSoft, clearly, [a just] portion of the SpringSoft business is function verification.

And they are known for their debug capabilities.

And then 20% of their revenues come from the custom and analog.

And so clearly, it is the lower end of the market and so those are the two things that they have.

We watch very closely on that and, meanwhile, and we are very confident with our product, Incisive.

In fact, we just announced our Incisive Debug Analyzer to counter that.

Also our Virtuoso is a gold standard and 6.1 is now -- is a preferred solution for the advanced custom and digital, analog and design.

So we are very confident with our, clearly, our roadmaps and that I review quarterly with our team and basically really driving the roadmap.

We like what we have and we are aware of the function verification that they acquired from SpringSoft.

We are aware of their analog that they bought from SpringSoft and Magma and they still have to sort it out in terms of the overlapping and then flow and meanwhile, we are laser focused on our area of our strength.

In terms of the EVE acquisitions, and clearly, we know they are addressing the low-end of the emulation and prototype application on EVE [that have].

Meanwhile, our Palladium is a gold standard and we have the roadmap to continue to drive and we have the processor-based Palladium and that clearly, the customer likes; the feedback is very positive.

We continue to drive our roadmap and continue to engage with the customer to provide the capacity, the performance and the requirement from the customer.

Thanks, that is helpful.

And last quarter you had announced orders for 14 Palladium XP units for one particular customer; can you provide us with any update on expectations about when these units are expected to ship?

No, we're not giving specifics, but it is over time.

Would it be safe to assume just across the next few quarters, multiple quarters?

Yes.

It is over time.

Okay, and then just a last one from me.

As we all know there has been a lot of negative sentiment out there for some of the semi customers, but can you maybe just provide us an update on your outlook for growth in the core EDA spending for the industry as a whole?

And what type of scenario heading into 2013 could really impact that and change that?

Yes, it is a good question and this is the outlook and the environment are clearly, as I mentioned earlier, there are some short-term challenges.

Some of our customers announced and guide to Q4 and they are down 5%, 10%, but clearly, we also have some customers who are doing extremely well and also provide a highlight on the Q4 outlook.

But clearly, now we can see mobile, data structure, infrastructure are growing and with all the new announcement from Apple yesterday and then Microsoft and Google.

So I think there's some very positive sign.

We don't see any slowdown in terms of R&D design and so I think we clearly see that.

And then as I mentioned earlier, more and more system companies try to do vertical integrations and they are trying to drive optimization for the semiconductor to support their web application and software service.

That's now opened up tremendous opportunity for us in what we call application-specific design.

This is also very important in terms of driving that whole vertical collaboration that we emphasize a lot with our customer.

And then the other thing is also the whole mixed-signal content is increasing and that really plays into our strength.

So all in all, I think now clearly, we have some short-term challenges in the industry and then we are watching the macro environment carefully.

We are going to be cautious and we listen to our customers and our customers' customers very closely and monitoring that situation and then meanwhile, really focus on execution, our roadmap execution, our R&D development to drive success here.

Thanks, that's helpful.

Sterling Auty, JPMorgan.

Thanks, guys.

Apologize if you talked about it -- balancing multiple calls but the duration down to, I think you said 2.4 years.

What is the sense your customers are giving?

Is that really just the confidence in what they're seeing in the current market outlook?

And since the duration has really shortened up over the last couple years, when are we going to start seeing some of those early contracts that get shorter duration contracts start to roll back around?

Can you give us a sense of what their run rate renewals look like, renewing on a shorter-term basis?

Yes, on duration, Sterling, we just take the natural requests from our customers, right?

So the 2.4, it's going to fluctuate -- 2.4, 2.5, 2.6.

Some customers want longer deals, some customers are happy with shorter deals.

I think already we're seeing customers come back when they have shorter deals and come back to us for more licenses, renewals, those types of things.

I think one reason we say run rate is up contract to contract is because of that and because of the value we create for our customers, so --

Thank you.

Tom Diffely, D.A. Davidson.

Andrew calling in for Tom.

Lip-Bu, you guys have been performing quite well in the current environment and just looking forward, are there certain areas where you guys see share gain opportunities?

Say again the question?

Yes, just on share gain opportunities going forward?

Share gain, okay.

Sure.

So a couple of things we should emphasize, one, clearly on the digital front and we are making great progress.

We have significant investment in this area for the last three years.

I mentioned earlier, we take the leadership in the advanced node 3D-IC and also FinFET and also I think clearly, our relationship with ARM and the whole ecosystem help us tremendously.

As I mentioned in the past, a couple of quarters we have had a market share gain in the top 10 semiconductor in the digital front.

And then the other thing is we have a strong momentum.

We like our roadmap, our [strategy] product that we continue to drive and we also have good top talents coming in to help us and that we are recruiting.

And also a lot of customers are looking for alternatives.

Clearly, they want to have another alternative that they don't have to be so dependent on one and then the other thing is, all this we'll see the result in the longer selling cycle.

We continue to really laser focus and on winning the customer mind share and also continue to improve our product offering so that really solve the problem and the design challenge they have in the advanced nodes.

I think, Andrew, it is showing up in the numbers.

We are growing 14% to 15% organically.

We believe that is faster than our competitors are growing organically.

Okay.

Thank you very much.

Satya Kumar, Credit Suisse.

I have a couple.

It sounds like you are cautiously optimistic on EDA prospects but also your concern on the macro and what some of your customers are doing.

I was wondering specifically what does the customers' profitability levels going down mean for pricing trends that we will see in EDA more than the hardware and software side over the next few quarters.

Hi, Satya, this is Geoff.

So, yes, we are cautiously optimistic.

We obviously pay a lot of attention to the macro environment.

I think the key thing for us is the value that we give to our customers.

They, as their environment gets challenged, they do want to get new products out the door, all right?

One way to get through a downturn in the semiconductor business is to get new products out the door.

They are not getting rid of engineers, with a few exceptions.

So, the pricing environment is going to be what the pricing environment is going to be, but generally I think those two trends are positive for us despite the macro environment.

Okay.

And then on 20-nanometer, you talked about the tape-outs, I think 40 tape-outs in early phases.

When you look at some of the designs that you see in the pipeline and what you are taping out, do you see any differences in the level of double patterning that you see your customers do -- i.e., do some customers tend to use a lot more double patterning, some use a lot less?

Do you see any variations there on 20-nanometer?

I think there was an earlier question on this as well on what multiple patterning means for EDA?

I was wondering if there is a simpler way to look at on a per tape-out basis, for example, or for a given level of complexity, the dollars of revenue opportunity that you guys get when you go to 20- versus -- or do you have a 28-?

Sure, it is a good question.

Clearly, as I mentioned, we are very engaged with customers and foundry partners and IT partners in the 20-nanometer.

A majority of them are really steering the [past] chip stage and just to make sure that is not the -- can be fabricated, can be designed and then what are the advantage in the power of performance.

And then clearly, we have worked very close, we have announced with ARM, TSMC and Samsung.

We mentioned about the ST and many more so we have about 40 engagements and in some of these 20-nanometer.

And in some ways, very much a mix with the different customers.

They all have different way of doing things and then some emphasize more double pattern or even triple pattern so I think it's really mix -- depend on the customer preference and also the application they try to drive.

And then on the opportunity of 20-nanometer?

Yes, I think opportunity, I think is great and we are looking forward to that.

And customers are engaging quite heavily.

Clearly, in terms of -- in our very strong process and our DSP-intensive and also some of the graphic and then some of the mobile, in that the performance and power and geometry is important.

So those are the ones that you can expect where the customers are.

They are very heavily engaging and in fact, some of them already starting to look at another -- using 20- and FinFET, and then move into 16- and 14- and so that is where we are engaging intensively with our customer.

Okay, thank you.

Rich Valera, Needham & Company.

I want to complete that question I started to ask before.

So you gave those two metrics for 2013 and it seems like if you combine those with your 2012 baseline for your current guidance, it would imply you'd need roughly high single-digit revenue growth.

I'd come out with about 8% to hit those two -- 25% op margin with 50% incremental margins, so I was wondering is there anything we should take away from that or is that something that you are not willing to comment on at this point?

Yes, we are going to guide 2013 when we give the Q4 earnings call.

So we will be happy to talk more about that then.

Okay and just one more, if I could, just on cash flow.

Can you say, Geoff, if there is anything unusual in the 2012 cash flow in terms of timing, or one-timers or should we assume that cash flow number tracks upward next year consistent with the improvement in operating income?

Yes, so, Rich, on cash flow, we obviously work hard to manage our cash flow with our operating -- with our revenue and therefore, with our operating income.

Our cash flow as a percentage of revenue is higher than our operating income.

I think that is a good sign.

Any sense that it should continue to trend at roughly the same ratio there?

Yes, generally, it will match or exceed operating income as a percentage of revenue.

It should.

Great, thanks very much.

At this time, I would like to turn things back over to Mr. Lip-Bu Tan for closing remarks.

Thank you.

In closing, Cadence continues to deliver technology needed by designers and our business results reflect this.

EDA industry is also doing better job of delivering value to its customers.

While the macro environment remains uncertain, Cadence has made great progress over the past several years in (technical difficulty) technology, customer relationships, and financial performance.

I believe Cadence is well-positioned to continue to execute on all these fronts.

Thank you, everyone, for joining us this afternoon and I look forward to speaking with you soon.

Thank you for participating in today's conference call.

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